Chinese Supply Crisis to Delay Price Adjustment

Rabobank Dairy Quarterly Q3

25 September 2013

Faced with a local supply-side crisis China is buying huge quantities from the internationally traded market – squeezing out many other buyers. As a result, while international dairy prices peaked in April, prices remained exceptionally strong through Q3, according to a report by Rabobank.

“The easing of international dairy prices from their record peak in April lasted barely eight weeks,” explained Rabobank analyst Tim Hunt. “Forward pricing on the GDT Price Index suggests we are amidst a period of high pricing that is unprecedented in terms of its level and duration.”

By mid-September FOB Oceania prices for most dairy products were up on quarter opening levels. Powders and butter were just 10% to 15% below record levels, with cheese (which saw a more modest peak) of just 3%.

Market tightness remains primarily supply-side driven. While milk production in export regions moved back into expansion in July, improving local consumption and lack of stock has kept exports below prior year levels through recent months. Declining milk production through most of 1H 2013 saw international trade in dairy product volumes fall in Q2 for the first time in four years.

Tightness in an already stretched market became extreme when China, already the world’s largest importer, swooped into the market for 27% more product in Q2 than in the 12 months prior. It is becoming increasingly apparent that China is facing a supply-side crisis, with both structural and temporary factors pushing supply below prior year levels in 1H 2013 – with credible reports of a 6% contraction. The surge in Chinese buying in a shrinking supply pool pushed many other buyers to the side-lines, sustaining extreme pricing to ensure effective rationing of product.

Strong farmgate pricing and falling feed costs are likely to generate a solid increase in milk production in export regions in Q4 and into the new year, providing some downward pressure on prices. However, with exportable supply growth likely to lag, China still on the hunt for increased volumes, and accumulated demand from sidelined buyers, price relief from the currently exceptionally high levels is expected to be delayed.

“Most likely, the prospect of any significant softening in world prices will be delayed, possibly until Q2 2014,” commented Hunt.